The Deal
Wednesday, October 22, 
5:38 pm

by Andrea Orr
[Posted on November 5, 2007 - 5:31 PM]

Venture capital investors in EqualLogic Inc. will reap a more than 10-fold return from Dell Inc.'s $1.4 billion purchase of the storage software maker.

"Absolutely everybody around the table is extremely pleased with the outcome," said George Bischof, a partner with Palo Alto, Calif.-based Focus Ventures, one of EqualLogic's four backers, along with Charles River Ventures of Waltham, Mass., Sigma Partners of Boston and Toronto Dominion Capital.

The venture firms invested a total of $52 million in EqualLogic, maker of storage area networking technology, and were taking it public when the Round Rock, Texas, PC giant swooped in with its offer. The deal "yielded a very healthy multiple" said Sigma managing director Wade Woodson, who added that the deal is the largest ever cash purchase of a private venture company.

For Dell, which over the summer made acquisitions outside its core PC business, the EqualLogic purchase provides a swift entry into one of the highest-margin technology areas. That will help offset its dependence on the ultra-thin margins typical of the consumer PC sector, with storage technology already Dell's fastest growing business. The deal, the biggest in the PC maker's history, represents an aggressive move by founder and CEO Michael Dell to move the company deeper into software and services.
While sellers were more than pleased with the purchase price, there was no hint that Dell overpaid. Unlike some high-profile Internet companies that have fetched large premiums without a sound business model, Nashua, N.H.-based EqualLogic operates in one of the fastest-growing segments of technology today and already has hundreds of customers around the world.
According to filings made in connection with its planned IPO, the company generated revenue of $90.9 million over the last three quarters, earning $1.2 million, as its sales more than doubled from sales of $44.8 million in the year-ago period. The company sported gross margins of 65%.
EqualLogic makes enterprise storage technology for small and midsize businesses, schools and government organizations that cannot afford the state-of-the-art storage gear that the world's largest companies use. The exponential growth in everything from e-mail to employee records has created a conundrum for these smaller organizations with limited technology budgets. EqualLogic offers a simpler and cheaper way to store more of this data over Internet protocol networks, known as Internet Small Computer System Interface, or iSCSI.
"Data growth is just exploding right now, and until recently mid-market companies have not had a good solution," Bischof said.
The arrival of more efficient storage technologies from companies such as EqualLogic is meeting a long pent-up demand that is expected to lead to explosive growth. Research firm IDC projects the iSCSI market will increase from $600 million in 2006 to $6 billion by 2011.

Other companies serving this market have also made large exits. In October, Compellent Technologies Inc. of Eden Prairie, Minn., went public at $13.50 per share and rose 77% on its first day of trading to close at $24.19. Compellent's stock has since retreated to $15.79 per share, but continues to enjoy strong growth forecasts.
Like EqualLogic, Compellent's technology makes it more affordable for smaller companies to store and retrieve large quantities of data.

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